The global economy shows signs of improvement
At the start of the year, the global economy showed signs of strengthening, which was more widespread in services. In the United States, consumption stayed particularly strong and employment growth exceeded expectations; aggregate demand instead remained weak in China. According to the latest IMF estimates, global GDP will grow by just over 3 per cent in 2024, held back by tight monetary policies. Based on our estimates, world trade will expand by 2.4 per cent this year. The downward risks to the global economy are still significant, connected with a possible escalation of the ongoing conflicts.
The monetary policy stance remains restrictive in the United States and the United Kingdom
Disinflation came to a halt in the United States in the early months of the year. In March, the Federal Reserve and the Bank of England kept their policy rates unchanged and announced that their monetary policy stance will remain restrictive until the decline in inflation firms up. Investors have postponed their expectations of when monetary easing will begin in the United States. Despite rising bond yields, financial conditions in key advanced economies remain relaxed.
In the euro area, GDP stagnates and disinflation continues
At the beginning of 2024, euro-area GDP stagnated once again. Consumer price inflation has continued to fall, although in services it remains at high levels. The indicators that estimate the underlying price dynamics, net of the most volatile components, have dropped considerably since early 2023. According to our assessments, the recent price increases in maritime transport due to the tensions in the Red Sea are not expected to lead to any significant inflationary pressures. The ECB staff projections released in March indicate that euro-area inflation will return to a level consistent with its target in 2025.
The ECB keeps its key interest rates unchanged
In April, the ECB Governing Council decided to keep its key interest rates unchanged and announced that it would be appropriate to reduce the current level of monetary policy restriction if the Governing Council's updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner.
In Italy, the cyclical weakness of economic activity extends to the first quarter of 2024
According to our estimates, economic activity in Italy grew modestly in the first quarter of 2024, still held back by the decline in manufacturing, while services regained ground. Sluggish consumption, which is expected to recover only partially from the decline in the final quarter of last year, appears to have been accompanied by a slight increase in private investment, supported by internal funding.
The current account balance remains positive
The current account balance remained in surplus in the fourth quarter of last year. The improvements in the goods and services balances more than offset the deterioration in the investment income balance, which was affected by the rise in the ECB's key interest rates. Non-resident investors continued to make net purchases of Italian securities. Italy's positive net international investment position strengthened further.
The employment rate remains high and wages are gradually picking up
Employment remained stable in the first two months of 2024, though permanent employment continued to grow. The unemployment rate remained at historically low levels. Labour costs are expected to pick up pace during the year; profit margins - which are still high - are giving firms the leeway needed to absorb future wage increases without triggering inflationary pressures.
Core inflation declines further
In the first quarter, consumer price inflation remained subdued; core inflation declined further. Notwithstanding the tensions in maritime trade in the Red Sea, the prices of intermediate goods continued to fall. Firms and households revised their short- and medium-term inflation expectations downwards.
The monetary restriction continues to be transmitted to lending
The cost of lending remains high, still dampening the demand for loans by firms and households. Banks' high risk perception is contributing to keeping credit standards strict. Bank funding continues to decrease: the decline in current account deposits and Eurosystem refinancing has been only partly offset by the increase in other deposits and bond funding.
The Government approves the 2024 Economic and Financial Document
In 2023, general government net borrowing decreased to 7.2 per cent of GDP; the fall was less than projected last autumn because of the higher costs for the Superbonus. The Government approved the 2024 Economic and Financial Document. Under the current legislation scenario, net borrowing is projected to decrease to 2.2 per cent in 2027; the debt-to-GDP ratio is expected to rise by a total of 2.5 percentage points in 2024-26, owing to the cash impact of the building renovation tax credits accrued in recent years, and to then fall marginally in 2027.
Over the next two years, growth is projected to pick up pace and inflation to stay below 2 per cent
According to our baseline forecasting scenario, GDP is expected to grow by 0.6 per cent in 2024 (0.8 per cent not adjusted for calendar effects), 1.0 per cent in 2025 and 1.2 per cent in 2026, benefiting from the recovery in real wages and foreign demand. Inflation is projected to fall to 1.3 per cent this year, mainly reflecting the negative contribution of the energy component, and to rise up to 1.7 per cent over 2025 and in 2026. Core inflation will stand at 2 per cent on average this year and decline to 1.7 per cent over the next two years. The risks to growth are tilted to the downside and stem from the possibility that the impact of the ongoing monetary tightening may be stronger than expected, that the phasing out of incentives for residential building renovation could lead to a sharper-than-expected correction in construction, and that global trade may remain weak for longer than anticipated. The risks to inflation, instead, are balanced.
